"India Inc, led by the government, should position itself as a strategic destination to attract long-term foreign funds", says Pradip Shah.

Hot money flows into India have propped up the stock markets but India needs to get its act together and attract long-term, sustainable capital by sending out the right signals to the world community — we have to reduce our burgeoning fiscal deficit by cutting back on subsidies, allocate capital more effectively and ensure sustainability of reforms.

Ultimately, strategic investments are required to be deployed into capital- intensive sectors such as infrastructure and oil and gas to ensure we return to and sustain growth above 8-9%, Pradip Shah, chairman, IndAsia Fund Advisors — a corporate finance and private equity advisory business — tells ET in a freewheeling chat.

We are in a happy situation. The US is doing well, and Europe, which has not seen any growth, hasn't seen its economy shrink while a stimulus package and currency depreciation are working in favour of Japan. This cheap money has increased global investors' risktaking ability.

Among emerging markets, perhaps, only China and India can absorb such large volumes (cheap money). The question is how to draw not just portfolio flows but long-term strategic capital.

India Inc, led by the government, should position itself as a strategic destination to attract long-term foreign funds. This will mean debottlenecking sectors such as infrastructure and making manufacturing more competitive (to attract FDI) which, in turn, would also help boost stock market performance and create jobs.

Nearly 34% of India's savings are locked in unproductive assets. How can these be converted into productive assets?

Over the past few years, investment in gold has increased significantly — especially in bullion, bars, and securities related to bullion. These are completely unproductive assets, which involve sucking out money from our banking system and parking the funds abroad. It creates jobs in South Africa, not in India.

One ideal plan is to disgorge gold from individuals by giving them some economic incentive so that these huge reserves could be, say, exported and become a conduit for foreign currency flows. The government can enable disgorgement by clamping a wealth tax on non-jewellery gold.

Back to markets, despite an impressive run last year, retail investors are largely wary of making a comeback...

Retail investors have to hedge their investments against inflation. Whether it's directly or through mutual funds, they have to come to the equity market. Even though it is 20% equity and 80% fixed deposits, the decision on asset allocation should be critically done against inflation.

The sentiment in stock markets is positive. Do you share this or do you think we could do better?

I am optimistic. We are growing at 5-5.5% despite shortcomings in infrastructure, growing fuel and fertiliser subsidies and these benefits do not always trickle down to the beneficiaries. Where we have failed in is increasing and sustaining growth beyond 9%, partly because of leadership and administrative deficiency.

We have a number of good socio-economic programmes in place, however, their efficacy is poor. If the Planning Commission plays a larger role in ensuring that funds are allocated effectively, we could do wonders for the 410 million poor in our country.

Do you see a consolidation in the mutual fund industry?

Currently, the AMC business is less profitable. Over the past few years, equity mutual funds have seen huge redemption pressures and have not been able to attract much new capital, rather old money is moving in and out of sectors.

Most of the money invested in mutual funds is because of tax arbitrage. The abilities of mutual funds in stock- or debt-picking and giving superior returns in ways of strategic initiatives have gone down. Theoretically, consolidation is a must to reduce compliance, distribution and administrative costs.

Which sectors offer promise and which are the laggards?

Consumer products and pharmaceutical companies will perform well in the coming years because cheaper cost of production makes us a favourable destination for, say, generic drug development.

In India, consumption will grow faster than expected despite relatively low economic growth, high inflation and global uncertainties as we are an under-penetrated market.

On the other hand, the US government is planning to cut healthcare costs which will benefit Indian pharmaceutical companies as they can supply cheaper drugs to the US. Currently, infrastructure-development companies such as roads and ports are highly under pressure due to the delay in policy decisions.

Is the government doing enough to facilitate a rate cut by RBI?

Since P Chidambaram has taken over the hot seat, the government has announced a slew of reforms initiatives like foreign investment norms and finally taken a remarkable decision on hiking diesel prices.

However, RBI is not obliged to cut rates until it is convinced of the sustainability of such reforms amid an upcoming election and the threat of demand-driven inflation.

What happens in case RBI does not cut rates?

A 25-bps rate cut cannot be ruled out. If there isn't one though, we could see a correction but that could be an opportune moment to pick fundamentally strong blue chips. However, even if there's no cut, we have seen the high interestrate regime having topped out and a softer rate regime is imminent.